A tactic used by fund managers to cut risk could have the opposite effect.
Savers are being urged to urgently check their pension.

Workers in their fifties and sixties should urgently review their pensions to prevent movements in the financial markets reducing their retirement income, experts advise. Falls in asset values occurring over a matter of weeks could cut pensioners' incomes for life.

Some savers whose pension money has been moved to supposedly "low-risk" investments in the run-up to retirement have already suffered falls of almost 10pc in just two months.

Such extraordinary falls in the value of bonds, normally seen as stable assets, have come about because prices had been driven to unprecedented highs during the financial crisis. But investors are now rediscovering their appetite for risk and are taking their money out of "safer" assets such as bonds in order to fund purchases of shares.

As a result, bond prices have fallen sharply – and the value of pension funds that own bonds has followed suit. Many occupational pensions are largely invested in bonds in the approach to retirement. This process, which is called "lifestyling", tends to start five to 10 years before your expected retirement date. To start, perhaps 10pc of your fund will be switched from shares to bonds, rising in stages to as much as 90pc or even 100pc just before retirement.

Let's look at an example. One of the larger lifestyling funds is Aegon's Universal Lifestyle Collection fund. It starts to move your pension assets into supposedly less risky assets six years before the retirement date you specified when you joined the scheme. A year before that date, the final phase of the switch takes place, after which the fund will consist of 75pc bonds (gilts) and 25pc cash.

If this switch took place a year ago, the fund would now be worth 5.4pc less, according to data from FE Trustnet compiled by David Smith, a certified financial planner at Bestinvest. In the two months from May 6, it lost 8.6pc – a large fall for assets perceived as safe.

One argument used in favour of investing pension funds in bonds is that if the value of the bonds falls, it will be counteracted by better annuity rates. These rates broadly reflect gilt yields, which rise when prices fall.

But it wouldn't have worked this time. Over the past year, along with the 5.4pc fall in the fund value, annuity rates fell from 5.82pc to 5.66pc, Mr Smith said.

Let's assume the fund was worth £100,000 a year ago. If, like most savers, you used your pension to provide a 25pc tax-free lump sum and spent the rest on an annuity, your lump sum would fall by the same 5.4pc from £25,000 to £23,653, and your annuity income would be cut by 7.5pc, from £4,352 had you taken it a year ago to £4,024 now, Mr Smith calculated.

Source: FE trustnet

The bigger fall is due to the combination of the decline in the fund value and worsening annuity rates.

Lifestyled pension funds do not use a common technique used by many bond investors to reduce the risk of severe price falls. This involves the use of bonds that are close to the date at which they will be repaid. As investors know that the bonds will be worth their face value on a set date not far in the future, they will not sell them cheaply to someone else who would then be almost guaranteed a handsome profit.

He said lifestyled funds could not react to changing market conditions, such as today's low yields. "The pension managers set out in advance which funds they will buy at which times and don't deviate from it," he said.

Paul Taylor, the head of McCarthy Taylor, the wealth manager, said: "Lifestyling arrangements may be dangerous as clients may well be placed into bonds without knowing, as a default arrangement in pensions. While other options ought to be considered, it is unlikely they will be, since the process is deliberately automatic.

"Policyholders within a few years of retirement ought to seek advice. However, assuming that they intend to buy an annuity, they should at least protect their fund by moving to cash in stages between five and three years from retirement."

Ian Price of St James's Place, another wealth manager, said: "The assumption behind lifestyling is that everyone retires on a set date known at the time you join the pension scheme. But life isn't like that any more – especially now that employers are not allowed to force their staff to retire at a particular age.

"Instead, I see more and more people retiring gradually – over a 'decade of retirement' between, say, 60 and 70. If, for example, you ask your boss to work three days a week at 65, you may find that your salary covers essential spending and you can leave your pension to grow. In this case, starting to switch your pension into 'safer', lower-return assets at 55 is far too early."

He added that the idea of moving to less volatile investments was not a bad one, "but it's hard to say which assets will be 'safe' in 10 years' time".

"So my advice is to keep your pension under constant review, especially when you reach about 50. Every three to six months, see how the fund is performing and whether the asset mix is appropriate to the circumstances. If you are married, carry out these reviews as a couple – often you will each have a pension (or pensions) and you may well be different ages, so your combined earnings are likely to decline gradually anyway."

If you don't plan to buy an annuity but decide to take an income directly from your pension assets via income drawdown, be especially wary of lifestyling; you will probably want to hang on to assets that promise the chance of higher returns, which, at the moment at least, would mean shares.

Will bond prices continue to fall? No one knows, of course, but many professionals think they will. "We are meaningfully rotating the portfolio into 'risk' assets, particularly towards global equities and out of fixed-income [bonds], reflecting our view that the global economy is on a healing trajectory," said Olivia Mayell of JP Morgan's Multi-Asset Income fund.

Steve Russell, the investment director of Ruffer, the fund manager, was more succinct. He said all non-index-linked bonds were "poisonous".